Herman Miller & Co. is engaged primarily in the design, manufacture, and sale of furniture systems and furniture, and related products and services, for offices, and, to a lesser extent, for health-care facilities and other uses. Through research, the company seeks to define and clarify customer needs and problems existing in its markets and to design, through innovation where feasible, products and systems as solutions to such problems. Herman Miller Inc. has a market cap of $906.5 million; its shares were traded at around $16.22 with a P/E ratio of 20.3 and P/S ratio of 0.6. The dividend yield of Herman Miller Inc. stocks is 0.5%. Herman Miller Inc. had an annual average earning growth of 5.3% over the past 10 years.

Highlight of Business Operations:

Orders in the second quarter were $345.7 million, a decrease of $80.3 million or 18.8 percent over the same period last year. In August 2008, we implemented a general price increase which had the effect of pulling ahead approximately $35 million in orders that would have been received in the second quarter. Factoring in the impact of these orders, the comparison with last year would be an approximate decrease of 25 percent. We noted that year-over-year orders have increased in our Other category with slowing decreases in our North America and Non-North America categories. North American orders decreased 22.5 percent, while non-North American orders decreased 15.0 percent. Orders within our Other category increased 220.0 percent for the current quarter compared to the same period last year. On a sequential quarter basis, orders increased 7.3 percent compared to the first quarter of fiscal 2010, when we reported orders of $322.1million.

Operating Expenses and Operating Earnings Second quarter operating expenses were $92.1 million, or 26.8 percent of net sales, which is a decrease of $8.7 million from the second quarter of fiscal 2009. Operating expense included $2.2 million of restructuring costs in the second quarter of fiscal 2010, an increase of $1.8 million from the second quarter of fiscal 2009. The current quarter also included $4.7 million in operating expense of Nemschoff. We remain committed to aligning our operating expenses to business levels as we continue through the current economic environment. A significant driver of the year-over-year improvement is the cost-reduction actions we implemented in the third quarter of fiscal 2009 and first quarter of fiscal 2010. These were in part offset by continued increases in cost related to our health insurance coverage, which were $2.6 million higher than the prior year same quarter.

Other Income/Expense and Income Taxes Net other expenses of $4.3 million in the second quarter ended November 28, 2009 were $1.3 million lower compared to the prior year quarter of $5.6 million. The primary driver of the decline is lower interest costs, a result of the retirement of $75 million of our 7.125 percent bonds. For the quarter, interest expense of $5.2 million is $0.8 million lower than the same period last year.

Net sales within the Other category were $11.7 million, down 21.3 percent from the prior year level of $14.9 million. These sales are primarily related to our Herman Miller for the Home business. Orders within this category were $15.1 million, increasing 219.6 percent over prior year levels. The operating loss in the quarter for this category was $1.5 million, a decrease of $3.1 million from the operating income of $1.6 million in the prior year second quarter. Operating income for this category includes expenses associated with the operations of Convia.

Changes in working capital balances for the quarter drove a source of cash totaling $2.5 million. The main drivers of working capital were an increase in accounts payable of $11.4 million and an increase in accrued compensation of $11.2 million. These amounts were offset by an increase in accounts receivable of $19.0 million and an increase in the net inventory balances of $5.1 million. Approximately half of the inventory balance increase in the quarter was due to an increase in the amount of direct business, where revenues cannot be recognized until installation is complete (described in more detail below).

Cash Flow Investing Activities Our most significant cash outflow related to investing activities was the acquisition of Nemschoff. The acquisition net of cash totaled $30.4 million. Additionally, as part of the acquisition and in exchange for cash, we received a note in the amount of $6.7 million with full offset rights against potential contingent payments. We purchased $5.6 million in capital assets during the second quarter of fiscal 2010, and $11.4 million year-to-date. This compares to $7.7 million and $15.8 million, respectively in the prior year.

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